All good things come to an end. November marked the end of a remarkable winning run for global stock markets, as the MSCI All Country World index closed out the month just 0.1% lower than it started.

Cautious start to the Santa Rally

Markets started December on the back foot. Another sell-off for crypto currencies signalled souring sentiment in the market’s more speculative corners. Meanwhile, Japan’s central bank hinted that the next move for its interest rates would be higher, boosting the yen but lowering the price of bonds.

Shares fell in Asia and Europe as the week got under way, providing an inauspicious start to what is usually a strong period for stock markets. History shows that December is often one of the best times of the year to be invested.

Our analysis of the FTSE 100 and S&P 500 shows that markets rise much more often than they fall in December. In the UK, there have been positive returns in 24 out of the past 30 years. In America it’s 22 years out of 30.

And it’s not just that markets rise. They deliver better returns than the monthly average too. Here in the UK, markets have gone up by 2.1% on average in December. That compares with just 0.3% on average.

Although November was down overall, the month ended with a more positive tone. The S&P 500 was up from 6,603 to 6,849 last week. Here, the FTSE 100 resumed its push towards 10,000, ending the week at 9,721. The bull market broadened out again, too. The number of big US companies above their 50-day moving average doubled from 30% to 60%.

Bubble talk eases

Although, there’s still some concern about an inflating AI bubble, nerves have eased as investors compare valuations with 25 years ago – they are high but less so than during the dot.com boom. And they are encouraged by still buoyant earnings. Forecasts for the next two quarters show continued double-digit earnings growth.

Any excess in sentiment looks to be localised. Yes, some unprofitable tech stocks stand at unsustainable valuations, but markets as a whole are not expensive, especially outside the US.

This makes a strong case for diversification. And not just geographically. High quality companies – those offering high returns on equity, stable earnings growth and low debt levels – are historically cheap. Big household name companies around the world – the likes of Tesco and AstraZeneca here, Lockheed Martin in the US and Lenovo in China – trade at their biggest discount to the overall market since the dot.com bubble.

It makes a good case for active versus passive investment. And for staying invested. Shifting the balance of a portfolio to more lowly-valued stocks can reduce the need for market timing, which has been shown to be almost impossible to do consistently well.

In the spotlight this week

With the US government open for business again, this week will see the publication of delayed September inflation data. Expect prices to have risen by 0.3% in the month, a similar rate to August. Year on year, inflation is forecast to be marginally higher at 2.8%, up a bit from August’s 2.7%.

The Federal Reserve is expected to take that as a green light for a third consecutive quarter point interest rate cut next week. Two more cuts are pencilled in for the first half of 2026.

Also in focus this week will be European inflation. It’s expected to have settled at just above the ECB’s 2% target, although the central bank said last week that inflation risks were now ‘two-sided’. That argues for interest rates staying at their current 2%, half their peak level.

In China, there will be further evidence of a slowing economy. Purchasing managers’ index data is expected to show the ongoing impact of a government push to clamp-down on deflationary over-production.

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